Archive: March 2015

Chancery Court Holds Fee-Shifting Bylaw Inapplicable to a Former Stockholder Because it Was Adopted After Stockholder’s Equity Interest Was Eliminated

By Susan Apel and Max Kaplan

Chancellor Bouchard finds, as a matter of first impression in Delaware, that a non-reciprocal fee-shifting bylaw is inapplicable to a plaintiff stockholder because it was adopted after the plaintiff’s interest in the corporation was eliminated in a reverse stock split.

In Strougo v. Hollander, C.A. No. 9770-CB (March 16, 2015), Plaintiff – a former stockholder of First Aviation Services, Inc. (“First Aviation”) – challenged (on behalf of himself and a putative class) the fairness of a 10,000-to-1 reverse stock split that cashed out the ownership interests of Plaintiff and the putative class at the request of the Chief Executive Officer and controlling shareholder of First Aviation in order to take First Aviation private.  Four days after consummation of the reverse stock split, the First Aviation Board adopted a non-reciprocal fee shifting bylaw that required any “current or prior stockholder or anyone on their behalf” who initiates or asserts a claim or counterclaim against First Aviation or any director, officer or employee and who does not obtain a judgment on the merits that substantially achieves the full remedy sought, to be jointly and severally liable for all fees, costs and expenses incurred in connection with the claim or counterclaim.  There was no public announcement to the First Aviation stockholders that the board had adopted the bylaw and Plaintiff was notified of the bylaw after the lawsuit was filed.

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Stating That an Inspection under DGCL Section 220 Is Not “Merely For The Curious,” The Chancery Court Reaffirms The Need for a Stockholder to Show a Proper Purpose for a Section 220 Demand and, in Doing So, Holds That a Derivative Suit That is Dismissed With Prejudice is Collateral Estoppel as to All Stockholders

By David Bernstein and Lauren Garraux

Vice Chancellor Noble denied the demand of plaintiff Fuchs Family Trust to inspect the books and records of defendant Parker Drilling Company under Section 220 of the Delaware General Corporation Law and, in doing so, held that Fuchs’s ability to institute future stockholder derivative litigation — one of the stated purposes underlying its demand — was barred by collateral estoppel based on the dismissal with prejudice of a prior stockholder derivative lawsuit — to which Fuchs was not a party — on procedural grounds.

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Chancery Court Finds Arbitration Clause in Limited Liability Company Agreement Survives Company’s Conversion into Corporation Despite Corporation’s Litigation Only Approach

By Scott Waxman and Peter C. Seel

In 3850 & 3860 Colonial Blvd., LLC v. Griffin, the Chancery Court denied a motion to dismiss and stayed the proceedings on all counts, finding that the arbitration clause in the limited liability company agreement controlled and the case must be submitted to an arbitrator to decide the issue of substantive arbitrability.

On February 26, 2015, the Chancery Court in 3850 & 3860 Colonial Blvd., LLC v. Griffin, C.A. No. 9575-VCN (Del. Ch. February 26, 2015) (Noble, V.C.) addressed the recurring theme of substantive arbitrability in a dispute that involved the conversion of a limited liability company into a corporation and their conflicting dispute resolution mechanisms. In 2007, defendant Christopher Griffin (the “Defendant”) formed Rubicon Media LLC (“Rubicon LLC”). In 2011, the Defendant reformed Rubicon LLC’s capital structure and, in 2013, converted Rubicon LLC into a corporation: Rubicon Inc. (“Rubicon Inc.,” and together with the Defendant, the “Defendants”). Among other things, the conversion of Rubicon LLC into Rubicon Inc. altered the rights of shareholders with respect to the dispute resolution process. The operative clause in the LLC Agreement (the “LLC Provision”) directs the parties to resolve disputes through mediation and arbitration, whereas the corresponding provision in the Certificate of Incorporation (the “Charter Provision”) designates the Delaware Court of Chancery as the exclusive forum for all disputes.

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Are Partial Written Stockholder Consents Between Annual Meetings Sufficient to Fill Board Vacancies? Chancellor Bouchard’s Ruling in Elite Horse Investments Ltd. v. T3 Motion, Inc. Suggests “Yes”

By Michelle Repp and Lauren Garraux

Ruling of Chancellor Andre Bouchard suggests that partial written stockholder consents between annual meetings may be sufficient to fill board vacancies and calls into question stockholder written consents not dated by hand.

Elite Horse Investments Ltd. (“Elite”) is a stockholder of T3 Motion, Inc. (“T3”), a Delaware corporation. T3’s bylaws provide for a seven-member Board of Directors. As of December 26, 2014, T3’s board had four vacancies, with the other three directorships occupied by T3’s CEO, William Tsumpes (“Tsumpes”), and two other individuals (collectively, the “Existing Directors”). On December 26, 2014 and January 20, 2015, Elite and other stockholders of T3 delivered to T3 two written consents relating to the composition of T3’s board, as follows: (i) on December 26, 2014, Elite and seven other stockholders holding more than 65% of the outstanding shares delivered a signed stockholder written consent dated December 17, 2014 (the “First Consent”) pursuant to which they filled the four vacancies with new directors (the “New Directors”); and (iii) on January 20, 2015, Elite and six other stockholders holding no less than 58% of the outstanding shares delivered a signed stockholder written consent dated January 15, 2015 that ratified and retook the actions reflected in the First Consent and removed Tsumpes and one of the other Existing Directors from T3’s Board (the “Second Consent”) (collectively, the “Consents”).

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Chancery Court Denies Motion to Dismiss in Case Seeking Removal of Trustees for Misconduct

By Eric Feldman and Patrick Jamieson

In response to demands by trust beneficiaries seeking removal of two trustees pursuant to Delaware law governing fiduciary relationships generally as well as a declaratory judgment that one trustee acted with gross negligence or willful misconduct, the Delaware Court of Chancery denied the trustees’ motion to dismiss, finding it was reasonably conceivable that both trustees were unfit to serve and that the one trustee could have acted with willful misconduct.

Petitioners in United Brotherhood of Carpenters Pension Plan v. Fellner, C.A. No. 9475-VCN (Del. Ch. February 26, 2015) (Noble, V.C.) are trust beneficiaries who collectively hold a 78.61% beneficial interest in three trusts (the “Trusts”).  Their interests stem from their 2008 purchase of limited partnership interests in a Delaware limited partnership whose general partner, BSF-TDC GP, LLC (“BSF-TSC”), was controlled by Michael Baumann.  In 2012, Baumann converted the limited partnership into a publicly traded Real Estate Investment Trust (“REIT”).  The limited partnership exchanged its ownership interests in various entities for 2,904,910 REIT common shares, then valued at $18.  Following the conversion, the limited partnership held only the REIT shares and two adjoining parcels of land and consequently determined to transfer its assets into a liquidating trust (the “Master Trust”) pursuant to a Plan of Liquidation and Liquidating Trust Agreement.  BSF-TDC was named as trustee of the Master Trust and the limited partners were designated as beneficiaries.

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Chancery Court Denies Specific Performance of Retrospective Drag-Along Right Based on Prospective Terms of Contract and Declines to Decide Whether a Common Stockholder Can Contractually Waive Statutory Appraisal Rights Ex Ante

By Michelle Repp and Marisa DiLemme

Halpin v. Riverstone National, Inc. concerns a group of minority stockholders seeking appraisal despite a “drag-along” provision in a Stockholders Agreement. The Chancery Court found that the “drag-along” provision was not enforceable in this merger situation because the stockholders received notice of the merger only after the transaction had been consummated and the Stockholders Agreement only gave a prospective “drag-along” right, not retrospective.

In Halpin, five minority common stockholders (the “Minority Stockholders”) of Riverstone National, Inc., a Delaware corporation (“Riverstone”), sought appraisal of their shares after a June 2014 merger of Riverstone with a third party. The merger was approved by the written consent of Riverstone’s 91% controlling stockholder, CAS Capital Limited (“CAS”), on May 29, 2014. Riverstone counterclaimed against the Minority Stockholders and sought summary judgment in its favor on the appraisal claims based on a stockholders agreement (the “Stockholders Agreement”) between Riverstone and the Minority Stockholders entered into in 2009 that included a drag-along obligation of the Minority Stockholders. The Chancery Court, ruling on the parties’ cross-motions for summary judgment, granted the Minority Stockholders’ motion and denied Riverstone’s motion.

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Valuing Stock in a Delisted Corporation Is a Proper Purpose for a Books and Records Request Under DGCL §220; Evaluating Risk in That Company Is Not

By David Bernstein and B. Ashby Hardesty, Jr.

A Post-Trial Master’s Report ruled that conducting a risk evaluation regarding a company was not a proper purpose for a Section 220 books and records demand, but that valuing the company was.

On February 26, 2015, Master LeGrow issued her Final Report in Southpaw Credit Opportunity Master Fund LP v. Advanced Battery Technologies, Inc., C.A. No. 9542-ML (Del. Ch. February 26, 2015), recommending that the Court order Advanced Battery Technologies, Inc. (“ABAT”) to produce certain books and records for inspection under Section 220 of the Delaware General Corporation Law, subject to a standard confidentiality agreement.

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